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Jan 16, 2004

THE LEGAL LINE

Ed Maldonado, Esq.

Dear Legal Line,

Several months ago I met a guy at a bar during a reseller convention who professed to have constructed a Hybrid VoIP network ready to pass traffic termination in Colombia and Ecuador. We met because he was looking for a U.S. client to commercialize this network thru a prepaid calling card. The network was supposedly interconnected in both countries with the PTTs with all the necessary equipment ready to interconnect there. It seemed to be a good “white line” route ready to go so I followed through with it. This guy later passed me a network design map thru email showing all the specs and listing competitive pricing. We signed a US based carrier services agreement after that and I began structuring a specialty card for on-net and off-net services with both Colombia and Ecuador in mind at the rates he gave me. At the time I asked him for copies of his interconnect contracts but I was honestly more focused on finalizing the international services structuring, distribution and printing of the cards to follow thru.

Two weeks ago he called me and told me that rates needed to be adjusted because the PTT had a price change with him. Before I looked at the contract, we got into it and the whole thing ended with both of us screaming breach of contract. We later cooled off and I carefully read the contract. It says that the rates in the Exhibit were “subject to” his agreement with the PTTs. We talked again and generally agreed to adjust the pricing and our contract. I am now reviewing the whole thing again and realize that my profitability has been reduced. I can still make it profitable if I go forward at the adjusted price but it will be tough. My question is about keeping that price. Is there any way to verify the price he is getting from the PTTs if I get the PTT contracts? Having a copy was a condition of me going forward with the adjusted agreement. The whole thing still makes me feel as if I am getting played. If it is real, my profit is fair. If not, I will lose more than just the printing and deposits I have given this guy so far. How can I check this guy out or at least any PTT agreements he passes me as the ones he has in these countries? If I pull out now I lose money, but maybe it will be less than if I stay with him after actually distributing on a first-use basis. How do I know difference here?

- When Contracts Fail

Dear Failed Contracts,

The reality of this situation may not be as pessimistic as you think. Having some experience in both studying law and working in Latin America, including Ecuador, I think that there are a few more questions in this transaction that you should parlay to this guy before picking up your marbles and licking your wounds. Before giving them, however, I think you need a context in which to evaluate their importance. Let’s begin with Colombia. If you are dealing with “white line” termination there, four companies are critical: Telecom Colombia; Orbitel also know in the US as Cinco Telecom; Empresas Telefonica de Bogotá (ETB) and Empresas Publicas de Medellin (EPM). In the case of ETB and EPM both are local providers (the equivalent of Bellsouth in the US before getting long distance service approval) and usually they use Telecom Colombia, Orbitel, or an international carrier for long distance long haul. These two are generally good for specific termination to remote cities, but not general use. In the case of Orbitel, or its US subsidiary Cinco Telecom, there is no interconnect agreement — they do work via carrier service agreements that usually involve no equipment, since they are already in the US. In the case of Telecom Colombia, or ColTelecom its US subsidiary, there may be an interconnect agreement of sorts. This is because Telecom Colombia is a market dominant PTT and is quasi governmental to boot. This means that if there is an agreement, a long approval process is usually involved. Most that hold this type of agreement are direct resellers for Telecom Colombia. Likewise, most of these contracts can be identified by approval authorizations by the Ministry of Telecommunications in Colombia, as they must be approved much like interconnection agreements are by the state utility commissions here in the US — docket number and final approval are marked on each. Another distinct feature of these contracts is an International Chamber of Commerce (ICC Paris) arbitration clause that requires at least 50K to arbitrate any contract dispute should it arise. While these are good indicators, this is not a guarantee that the contract in hand is not a fake. Proof, as true for any major transaction in telecom, is in the due diligence. The problem is that most US telecom attorneys are stupefied when presented with foreign law due diligence. This is why a Colombia attorney, here in the US and experienced in telecom, would be necessary to truly confirm what you may have in hand. I, like many other professionals in this practice of law, maintain such attorneys on staff or on call — so getting one is not impossible for a telecom attorney. This documentation would then need to be crosschecked with the Ministry of Telecommunications to verify approval. In general this agency is very open and friendly, should you have a good rapport, speak Spanish and are a telecom attorney. They are very forthright about what has or has not been approved.

The problem you may have is from a business/regulatory perspective, rather than a contract verification issue. Unlike the US, Colombia is not entirely open to telecommunications competition. Aside from the PTTs mentioned here, there is no licensed class of resellers like those that exist in the US under the IXC license. A Colombian reseller either has a contract with the PTTs, or, is not legally reselling. The next closest license holder to that of a US reseller in Colombia is the Value Aggregator Class which is primarily an Internet Provider. Often they refer to themselves as Hybrid VoIP carriers — so this may be the key clue. The truth is that if they offer telephony termination over a certain percentage, they could lose their license as a Value Aggregator as they are not approved for such service in Colombia. This is not far fetched from reality as Colombia just recently de-criminalized a public law that made it a crime punishable by imprisonment and forfeiture of property (equipment) if a communications provider was terminating telephony traffic through a by-pass of the PTTs. So if your guy in this deal is not a true contractual reseller, this whole guise of interconnection may be a ruse awaiting your future discovery that he is just a Value Aggregator — and not really in position to complete this deal for a “white line” route.

Now let’s talk about Ecuador. Like Colombia, the Ecuadorian Telecommunications market is not entirely open to competition. In Ecuador there are four companies critical to authorized termination: Pacifitel SA, Andinatel SA, Linkotel SA, and ETAPA which are the primary providers of termination. Both Linkotel and ETAPA have regional limitations for local access (again, like Bellsouth in the US before getting long distance service approval). Pacifitel and Andinatel both offer countrywide termination with variances in pricing based upon which of the two is using the others network. The unique feature that Ecuador does offer, in contrast to Colombia, is actual interconnection with the PTT. Pacifitel, for example, will allow US common carriers with 214 Authority to interconnect with them if all equipment is supplied and maintained by that carrier. However, this contract is not a private one — all interconnection agreements with the PTT must first be approved by The Secretariat of Telecommunications and CONATEL. These two regulatory agencies act much like a combination of the FCC and state commissions here in the US, leaving any final approved interconnection contract with docket numbers and a final authorization which are also usually published by CONATEL afterward. Should your guy have an interconnection agreement with Pacifitel or Andinatel there will be plenty of documentation.

One issue to also keep in mind is the possibility that this guy has a private termination contract with a local loop provider in Ecuador, instead of the PTT. If he does, he can terminate, but only to a specific city in Ecuador. Should you forward calls to other cities beyond the loop provider’s license then he would have to utilize the PTTs network and price increases would be involved. Leaky operators tend to use this tactic. Like Colombia, there have been a lot of leaky operations in Ecuador due to remote termination points, high prices by the PTTs, and corruption. While the Ecuadorian PTTs and the regulatory agencies are beginning to combat these providers, leaky networks still actively operate in Ecuador.

Now back to your original questions. In this deal, you are negotiating for “white line” or clean routes terminating in Ecuador and/or Colombia. This is a very specific type of service. Many major carriers here in the US do not even use such a service with their Latin American network grooms. Having, or not having, a “white line” route with this network is the most critical issue, in my view, for determining whether to go forward with the contract or not. On the Colombia route, demand that he show you either a reseller agreement and interconnect documentation with Telecom Colombia, a carrier agreement with Cinco Telecom or Orbitel, or an agreement with a local access provider. If he can’t or won’t, then start limiting your losses because it sounds like he’s leaky. Thereafter, go back to your contract and see if there is a “Representations or Warranty” clause where he warrants to have a good service or network. If it does you may have a basis to sue him in court here in the US. If he produces a reseller agreement or documentation thereof, consult attorneys that have a Colombian telecom attorney to verify what you have in hand.

On the Ecuadorian route, demand that he show an interconnection agreement and reference an approval number in CONATEL. If he can’t or won’t, then start limiting your losses because, again, he’s leaky. In all fairness, you may want to ask him if he has a private agreement with a local loop provider, or is a local loop provider. If this is the case, he has termination, but not “white line” countrywide termination and that was not the apparent terms you agreed upon. Again, go back to your contract and look for warranties as your first step in claiming damages. Should you decide to go forward in the end, then realize what kind of termination you have in hand, and realize that prices may increase or the operation may not be able to have the ASRs first expected, like always, consult a telecom attorney experienced in these issues. He can properly advise you about any nuance that your situation may have, or what kind of damages you may be entitled to through a lawsuit.

GOOD LUCK AND SUCCESS IN THE INDUSTRY

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